Report on Corporate Governance Practices of Trust Bank Ltd

Submitted To :
Mr. Md. Nehal Ahmed & Mr. Md. Masudul Haque Coordinators Foundation Course for MTOs of TBL Bangladesh Institute of Bank Managements Mirpur-2, Dhaka.

Submitted by :
Md. Mamin Ullah Management Trainee Officer Trust Bank Ltd. Beni Branch.

Date of Submission : November 17, 2010

1

Letter of Transmittal
November 17, 2010 Mr. Md. Nehal Ahmed & Mr. Md. Masudul Haque Coordinators Foundation Course for MTOs of TBL Bangladesh Institute of Bank Managements Mirpur-2, Dhaka. Subject : Submission of assignment of corporate governance Practices in Trust Bank Ltd. Dear Coordinators, With due respect this is to inform you that it is a great pleasure to me for submitting the assignment to you. The topic of the assignment is corporate governance practices in Trust Bank Ltd. which was approved by you. I have tried my heart and soul to make the assignment complete and meaningful. I have met with top executives of the said organization for several times to collect adequate and accurate information. However, the issue is new and somewhat complex. So, there may be some shortcomings in the assignment that you will, I strongly hope, consider in an apological mind. I would appreciate you if you kindly call me for any further explanations in connection with this assignment. With thanks and best regard, Sincerely Yours Md. Mamin Ullah Management Trainee Officer Trust Bank Ltd. Beni Branch.
2

Chapter : One
Introduction 1.1 Background of the study. The term corporate governance is now a buzzword in todays business world. Almost every business organizations annual report contains some writings on this issues. However, the applability of corporate governance is not some in all organization. There is no doubt that proper practices of corporate governance help every organization to run in a healthy way. The challenge of every business organization is to maximize shareholders value that requires an effective corporate governance system. Bangladesh as a least developed country (LDC) is driving towards the establishment of good governance because a good nation can not be ensured without transparent activities at all levels of the organizations. The importance of corporate governance is extremely high in cause of a banking organization because it deals with peoples money. Therefore, the risk is relatively high in this organization that can be mitigated through the accurate practices of corporate governance. 1.2 Objective of the study The intent of the study is to better understand the status of corporate governance practices in Trust Bank Ltd.

1.3 Methodology of the study The following methodological steps were followed in conducting the study : (a) Research Design : This study is basically descriptive in nature. The study was aimed at identifying the ins and outs of the corporate governance practices in Trust Bank Ltd. (b) Data Collection Methods : The data were collected both from primary and secondary sources.

Primary Sources :
The primary data were collected through a questionnaire. The questionnaire was developed solely for collecting information on corporate governance practices in the organization. The most important issues of corporate governance were covered in the questionnaire.

Secondary Sources :
Annual report of Trust Bank Ltd. 2007 SEC guidelines BB guidelines Website of Trust Bank Ltd. Relevant books

(c) Sample design

Target Population The target population were the top executives of Trust Bank Ltd. Sampling Type used

The study was conducted on the basis of non-probalrility sampling procedure. In this regard, both the convenience and judgment sampling methods were used. Sample size The sample size was 15 and it was determined on the basis of personal judgment. The sample size was because the respondents are more or less homogenous.

(b) Field Work

An extensive interview was conducted and each interview covered from 15 to 25 minutes. Again a close look was given to observe the respondents reactions during filling up the questionnaire. Finally, various reports and manuals, both external and internal were collected.

(e) Analysis of Data

Varies statistical metros were used to analyze the collected dada, Descriptive settees were used in anodizing the data. SPSS was used in this purpose.

1.4 Limitations of the Study :

From the beginning to ending, the study has been conducted with the intention of making it as a complete and accurate one. Notwithstanding there are some limitations of the study which are as follows: - All the executives were not contacted - The tie period for this study was short - Lack of experience in conducting such type of study. - Inadequacy of required data.

Chapter Two
Literature Review 2.1 Definition of corporate governance :
The term corporate governance has been defined by different auroras and scholars in different ways. The meaning of corporate governance varies from man to man. However, some important definitions of corporate governance are as follows : i) ii) Corporate Governance is about promoting g corporate fairness, transparency & accountability. Corporate Governance which can be defined narrowly as the relationship of a company to its shareholders, or more broadly, as its relationship to society. iii) Corporate Governance is the relationship between corporate managers, directors & the providers of equity, people & institutions who save & invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives & that the corporation itself conforms to the law & regulations.

2.2 Features of Corporate Governance :

The following are the most common features of corporate governance. i) ii) Corporate Governance is a system by which business corporations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the corporation.

iii) It spells out the rules and procedures for making decisions on corporate affairs. iv) It provides the structure through which the company objectives are set. v) It also provides the means of attaining those objectives and monitoring performance. vi) It deals with general interest of stakeholders.

2.3 Importance of Corporate Governance :

The term Corporate Governance has got paramount importance because of the following reasons. 1) 2) 3) 4) Good corporate governance creates access to capital. It is essential for the firms that want to stimulate private sector investment. It balances the conflicting interest of companys participants. Corporate governance helps the company to run effectively & efficiently & thus attract private sector investment. This in turn accelerates financial growth. 5) The presence of effective corporate governance system, within an individual company & across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. 6) Since effective governance ensures proper functioning of market economy, it ultimately results in low cast of capital, thus firms are encouraged to use resources more efficiently, thereby underpinning growth.

7)

According to CIMA, importance of Good Corporate Governance are Corporate governance reduces risk. It stimulate performance It enhances the marketability of goods & services It improves leadership It demonstrate transparency & social accountability

2.4 Factors deterring good corporate governance :

The following factors are considered very important in deterring good corporate governance. i) ii) Codes of Governance that lead to transparent reporting. Effective Board Governance & Process

iii) Effective Independent Directors iv) Informed business decisions v) A Culture of Risk Management vi) Active & Interested Shareholders vii) Presence of equal voting right viii) Separation of ownership from management. ix) A culture of timely reporting x) An evaluation system of CEO performance.

2.5 Elements of corporate governance :

The following elements are considered very much important for ensuring good corporate governance system. i) ii) Responsibility Who is responsible for what ? Accountability Who is accountable to whom ?
8

iii) Transparency - Are the important information about organization fairly and finely disclosed ? iv) Internal control Are the internal activities of the organization properly monitored and controlled ?

2.6 Board Development :

The primary responsibility of maintaining corporate governance in any organization lies in board. Therefore, board development is considered as an important factor of ensuring corporate governance in an organization. The various issues of board development are described briefly as follows.

2.6.1 Structure of the board :

It includes both the hard system and soft systems which are as follows: Hard systems, procedure and standards include : Board Charter & Work Plan Job description, qualities & technical qualification of directors Directors contracts Individual & Whole board performance evaluation Training & Director Qualification Forensic Test Leadership by Chairman Board of Directors code of Conduct peer fear of company, business community, professional institute.

Soft Systems, procedure & Standards

2.6.2 Board Charter

A board charter usually describes the board mission, functions, and values that cover specific issues which are as follows : Board Mission Create wealth for stakeholders, nature & increase assets of shareholders. Board Functions Agree & promulgate board function & evaluate performance. Set company mission vision & values Agree strategic plan, operating plan & budget for the following year. Review opportunities related to investment & divestment. Monitor managements performance in achieving the objectives set in operating plan & budget. Appoint, monitor & evaluate the CEO Ensure conformance with legislative requirements. Ensure there are adequate resources Communicate with the shareholders

Board Values
Conflicts of interest Work in best interest of the company Keep to companys mission

10

2.6.3 Size and composition of board.

Size Size depends on the requirement of the particular organization Not fewer than 3-5 Not more than 7-11 Diverse Mix More Independent Directors Qualities Professionalism

Composition

2.6.4 Board Work Plan

Deliberate Shift from evaluation of past performance to adding value Annual & quarterly Board Work Plan with required agendas. Time Budgeting Adding Value (40%) Risk Management (15%) Conformance (15%) Issues Management (15%) Monitoring (15%)

2.6.5 Leadership Role of Chairman

Relationship with CEO Relationship with team members

11

Confidence of stakeholders Ensure timeliness & relevance of information Heading director evaluation process Conducting Board meeting Be available Ultimate decision maker

2.7 Board Effectiveness :

There is no doubt that only an effective board can drive a firm towards the achievement of goals.

2.7.1 Critical Attributes of an Effective :

Independence Managing conflict of Interest Working in the best interest of the company Competency

2.7.2 Task of an Effective Board :

Determining companys vision & mission Determine the value to be promoted throughout the company. Determine company policies Determining, selecting, implementing & supporting strategic option. Determining the business strategies that underpinning the corporate strategy. Ensuring the fitness of corporate structure for strategic options
12

Delegating authority to management & monitoring their performance. Determining monitoring criteria to be used by the board. Ensuring the effectiveness of the internal control Ensuring that two way communication between shareholders & stakeholders are effective. Emphasis on the interest of shareholders/ & other stakeholders.

2.8 Board Empowerment

Now-a-days it is strongly believed that a board should be empowered to carry but its concerned tasks effectively and efficiently.

2.8.1 Meaning of Empowerment

The capability and independence of outside directors to : Monitor the performance of top management & the company. To influence management to change the strategic direction of the company if its performance doesnt meet boards performance & in the most extreme case, to change corporate leadership.

2.8.2 Requirements of Empowerment

Redefining the relationship CEOs clear understanding of Boards roles & responsibilities. Recognizing & respecting the boundary between monitoring management & actually managing the company by outside directors.

13

New form of teamwork Retaining CEOs power to lead the company while obtaining the guidance of active & informed directors.

2.8.3 Pressure for Empowerment

Pressure from Institutional Investors Poor Performance of CEOs Pressure from Government Competitive Council Controversy regarding CEOs Compensation

2.8.4 Invalid Assumptions About Empowering Board

Power is Zero Sum Advising & Monitoring are in Conflict There is no need to act unless a crisis strikes One size fits all companies

2.8.5 Factors Influencing Empowered Board Activities

Confidence in CEO Considering Empowerment as Companys Performance Complexity of the Decisions.

2.8.6 Characteristics of an Empower Board

Directors from outside of the company Small enough to be a cohesive Represent a range of relevant business & leadership experiences

14

Free Communication Existence of leader, where CEO is also chair of the board Committees are entirely made up entirely of outside directors Members receive information in a intelligible format.

2.9

Audit Committee

Every business organization should have an audit committee to oversee the operations of the organization. The primary responsibility of audit committee is to ensure that the activities of the firm one being curried but in accordance with the prescribed rules and regulation. The composition of members of audit committee is vital for every business organization. There must have some external members in the audit committee. The audit committee should report the board of directors timely and accurately with a summary of the organizational activities.

2.10 Risk Management :

Risk is an integral part of every business organization. Therefore, risk management is considered as an important issue of maintain corporate governance in an organization. The task of top management is to maintain a healthy balance between risk and return. There must have some systematic rules and policies regarding risk management in an organization.

2.11 Corporate Social Responsibility :

Every business organization is established with an aim at earring profit. But this should not be the only objective of a business firm. It has a number

15

of responsibilities to its stakeholders. The main motto of corporate governance is to ensure the interests of different stakeholders.

16

Chapter Three
Corporate Governance Practices in Trust Bank Ltd.
3.1 Trust Bank Ltd at a glance
Registered Name of the Company Registration No. & date Sponsor Shareholders Certificate of Incorporation received on Certificate of Commencement of Business Received on Banking License Received on First branch license received on Formal Inauguration on Corporate Web site E-mail : Trust Bank Limited : C-37960 (2260)/99, 17 June 1999 : Army Welfare Trust : 17 June 1999 : 17 June 1999 : 15 July 2007 : 9 August 1999 : 29 November 1999 : www.trustbank.com.bd : info@trustbanklimited.com : 17 May 2007 : 15 July 2007 : 19 July 2007 : 25 Sep 2007 : 24 Sep 2007 : 01 Oct 2007 : 01 Oct 2007

Initial Public Offering :

Publication of Prospectus Subscription opening Subscription closing Listed with Dhaka Stock Exchange on Listed with Chittagong Stock Exchange on Commencement of trading of shares at DSE Commencement of trading of shares at CSE

17

3.2 Corporate Governance Practices

3.2.1 Employees understanding on corporate Governance issues :

There is no doubt that a proper understanding of corporate governance among the employees is vital for any organization. This is important for ensuring transparency and accountability which are the main attributes of good governance. But unfortunately many of the employees do not have adequate understanding on issues of corporate governance. Very few employees were found who have complete understanding about corporate governance. The data collected in this regard is a follows : Particulars (a) Some understanding (b) Adequate understanding (c) Significant understanding (d) Complete understanding (e) No Comment % (Percentage) 47.77% 30.36% 17.41% 4.0% 0.95%

3.2.2 Elements of corporate governance in order of importance in the eyes of TBL executives.
There are some common issues of corporate governance which are considered its bedrocks, such as accountability, responsibility and internal control. But no consensus was found among the respondents in terms of the order of importance of these issues. But everybody agreed that these are the basic issues of corporate governance that the management of any organization should maintain.

3.2.3 Responsibility of Overseeing the Corporate Governance Issues :

18

Most of the top executives of Trust Bank Ltd. said that the primary responsibility for corporate governance issues within the organization is upto the Chief Executive Officer (MD). Again some executives believe that it is also the responsibility of the audit committee to oversee the corporate governance issues within the organization. However, from the study it was found that the following persons and teams bear the responsibility of maintaining corporate governance issues. The Chief Executive Officer (MD) The Board of Directors The Chief Financial Officer The Chief Financial Officer The Audit Committee Company Secretary. It is important to note that the bank has no designated office to deal with corporate governance issues. Generally the company secretary oversees the corporate governance issues.

3.2.4 Written corporate governance code or manual :

An organization should have a written corporate governance code or manual that the people of it should follow. A written code sends the message of corporate governance to all levels within the organization. But unfortunately TBL has no written corporate governance code or manual. However, the bank follows SEC and Bangladesh Bank guidelines in this regard.

19

3.2.5 Employee Code of Conduct

The necessity of having an employee code of conduct in an organization can not be described in words. It spells out the responsibility and accountability of employees of various levels in the organization. TBL has a written employee code of conduct. Moreover the bank has incorporated the code of conduct into employment contracts and has made it a requirement at employment.

3.2.6 Board of Directors

The board of directors is the central governing authority of maintain the overall performance of a firm. The bank company Act, 1991 states that the number of directors in the boards is maximum 13 (excluding CEO). The members of the board must perform their duties and responsibilities in such a way that is consistent with the firms vision and mission. The study has revealed various issues regarding the board of directors of Trust Bank Ltd. which are listed below. Major functions of the Board of Directors. The board approves budget and reviews the business plan on quarterly basis to give directions as per changing economic and market environment. It reviews the policies and manuals of various segments of business in order to establish effective risk management mechanism in all the operational activities of the bank. It also reviews the policies and guidelines issued by Bangladesh Bank and gives directions for their due compliance.

20

Board Character :
A board charter clearly specifics the rules, responsibilities and powers of the board members. Trust Bank Ltd. has a board charter that establishes the roles responsibilities and specific annual objectives of the board. The following are the elements that are included in TBLs board charter. Board Mission Board values Board functions Powers of directors etc.

It is important to note that the bank has a code of conduct for the board which can be regarded as a good symptom of corporate governance.

Independent Directors
The presence of independent director in the board is a good symptom of

good governance because they can protest the issues strongly if the said issues go against the general interest of stakeholders. At present Trust Bank Ltd. has no independent director in its board. The board of directors has decided to appoint an independent director in the board by 2008. It is important to note that he or she will also be a member of audit committee.

21

Depositor Directors According to the Bangladesh Bank guidelines, every bank

company must appoint 2 directors from its depositors within 30 September, 2008. Depositor director will be appointed by the Board of Directors with the prior approval of Bangladesh Bank. Trust Bank Ltd. has already appointed two depositor director in its boards within the said time. Members of Board of Directors
The study has revealed the following information regarding the member of board of directors. Number of members in the board is nine including Managing Director. There are two depositors directors in the board. There will be an independent director in the board by 2008. Most of the directors in the board are army personnel.

Board Meeting
The active and timely board meeting is considered as an important

means of ensuring corporate governance in the organizations. Frequent meeting of the board ensure better supervision and policy guidelines to support the growth of the business. The study has revealed the following information regarding the board meetings of Trust Bank Ltd. No of board meeting held in last year (2007) is 13. Average length of the board meeting are prepared in advance, but all the agenda may not be approved by the directors.
22

 The minutes of the board meeting are prepared and approved by all the directors.

3.2.7 CEOs performance evaluations system :

Ounces a ECO is in place, the board is responsible for evaluating his or her performance going forward. The process of performance evaluation should be used to influence the actions of the CEO to provide strong results for shareholders. Performance evaluation for the CEO has three prerequisites. The interest of the CEO and of the company must be aligned through compatible values and incentives. There must be mutually agreed upon goals, standards, and time frames for the result. Accurate and timely measures of the key indicators of success must be shared with the board. The CEOs performance can be evaluated depending on the following grounds. Success or failure in strategy implementation. Benchmarking with peers Outside assessments such as shareholders, customers, vendors, govt. agencies evaluation. Financial performance evaluation in terms of profitability, Rol, cashflow, growth and finally stability (predictability)

23

However, the board of Trust Bank Ltd. does have any written performance evaluation system to evaluate the CEOs performance. The board is in charge to evaluate the performances of CEO verbally.

3.2.8 Demarcation of power between the boards and the management.

Boards function is limited to formulation of policies for implementation by management. Management is heeded by the Managing Director. Managing enjoys absolute power in respect of recruitment, posting and promotion of manpower in accordance with Bangladesh Banks guidelines. In addition boards has delegated adequate administrative, business and financial powers to management for quick and efficient discharge of the Banks activities.

3.2.9 Audit Committee

There is doubt that an audit committee can play a vital role in maintaining the corporate governance issues within an organization. Trust Bank Ltd. has formed an audit committee in accordance with Bangladesh Bank BRDD Circular No. 12 dated 23.12.2002. The basic objectives of forming an audit committee by TBL are as follows. For ensuring transparency and accountability in the operations of the bank. For ensuring that the activities of the bank are conducted within the framework of policies, principles and plans as laid down by the board as well as the guidelines of the regulatory authorities issued time to time. The study has reveled the following information regarding the audit committee of Trust Bank Ltd.

24

 There are three members in the audit committee The committee is headed by a senior director. The committee has unrestricted access to all accounts, books and seconds to ensure that its job is conducted properly. The committee had three meetings during the year (2007) The committee submits the report to the board of directors. The members of the audit committee comprise of non-Executive Directors, Independent Directions (proposed) and company secretary. Apart from the audit committee, the board has appointed an independent auditor to assist both the committee and the board in discharging their supervisory functions.

3.2.10 Compliance of Regulatory guidelines :

Securities and Exchange Commission (SEC) issued corporate governance guidelines (notification dated 20 February 2006), on comply or explain basis, for the companies status of the said notification, SEC has asked the listed companies to report the compliance status of the said notification in the annual report. Trust Bank Ltd. has followed this guideline properly. Moreover, the bank also strictly maintains the rules and regulations provided by Bangladesh Bank. For example, it has made Initial Public Offering (IPO) to meet its paidup capital requirement. Moreover, the bank has appointed two depositor directors in the bank according to the guidelines of Bangladesh Bank.

25

3.2.11 Internal Control :

Effective internal control system is regarded as an important bedrock of corporate governance practices in an organization. Trust Bank Ltd. has set up a separate department named Internal Control and Compliance Department for maintaining the internal issues of the bank according to the proscribed rules and regulations. The department is handed by a Vice President. He has the primary responsibility to maintain the internal activities of the bank as per the rules and regulations set by the board as well as various regulator agencies.

3.3.12 Disclosure of Information :

The transparency of the activities of an organization is better understood by observing the nature of information that it discloses. The study has revealed that Trust Bank Ltd. ravenous the following information. a) b) c) d) e) f) Background of Directors Feed paid to External Auditors, advisor and other related parties Directors selling or buying shares in their company. Policies on risk management. Significant changes in ownership. Governance structures and policies

The bank discloses the above information through its web page, annual report and reports to regulatory agencies. It discloses financial statements to the stakeholders annually and semi-annually.

3.2.13 Risk Management :

26

There is no doubt that the degree of risk involved in banking business is extremely high. The executives of Trust Bank Ltd. Believe that risk is an integral part of their business and the main role of their risk management principles is to find the optimal balance of risk and return. They believe that in todays challenging environment, effective risk management is vital for maximization of shareholders wealth. The banks risk management process gives extreme importance on the maintenance of following types of risk. Credit risk Asset-liability/balance sheet risk Foreign exchange risk Internal control and compliance risk Money laundering risk It is important to note that the bank strictly following corporate governance manual as instructed by Bangladesh Bank at the time of sanctioning loads and advances to mitigate the risks.

3.2.14 Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) and be a key element and means for achieving greater business value in this competitive business world. Trust Bank Ltd. aims to be a socially responsible organization with an obligation to consider the interest of all the stakeholders in all aspects of its operation. This obligation is seen to extend beyond its statutory obligation to comply with legislation.

27

The study has revealed the following activities of Trust Bank Ltd. as a part of its corporate social responsibility. i) Special Reserve fond for providing stipend to poor but meritorious students, medical and other assistance to the disadvantaged section of the society, contributing detuning natural calamities. ii) Humanitarian Assistance during natural calamities. iii) Promoting sports. iv) Passport application processing.

3.2.15 Participation of the bank employees in corporate governance program.

The active and regular participation of the employees of an organization indicates the degree of awareness about corporate governance issues among the employees. The study has not found a satisfactory result in this regard. Very few top executives of Trust Bank Ltd. has joined programs on corporate governance issues. The result of the study in this regard is as follows. Particulars Yes No % 30% 70%

It is important to note that the bank has arranged various works shops on various regulatory issues different times for its employees.

3.2.16 Relationship between corporate governance and company performance :

28

The respondents were asked to rate the corporate governance issues with their company performance. Most of the respondents have said that there is a high relationship between corporate governance and their company performance.

29

The study has found the following scenario in this regard. Particulars Very high High Medium Low % 20% 65% 15% -

3.2.17 Employee Remunerations Packages :

A proper practice of corporate governance issues ensures the interest of all stakeholders. Employees of the bank are also one kind of stakeholders. So, it is logical to know the status of employee remuneration packages of the bank. The respondents, almost all of them are high executives of the bank, were asked to provide their opinion on employee remuneration packages i.e., whether the remuneration packages are competitive or not. The study has found the following results in this regard. Particulars Competitive Not competitive No comment % 20% 60% 20%

3.2.18 Recruitment and promotions of employees :

The transparency of an organization can also be justified through the examination of its recruitment and promotion policy. Trust Bank Ltd. has two types of recruitment policy fresh entry and lateral entry. The first batch of the banks Management Trainee Officers (MTO) were recruited through external organization (IBA), although the viva-voce was conducted by the top management of the bank. The recruitment policy of junior officers in extremely internal to the bank. Most of the employees think that promotion policy of the bank is transparent.

30

The study has revealed the following result regarding the fairness of the banks employee recruitment and promotion. Particulars Fair Not fair No comment % 65% 20% 15%

31